Download Key Trends in Valuing ASCs

Key Trends in Valuing ASCs
Clinton Flume, CVA
Director
Chance Sherer, CVA
Director
Learning Objectives
I.
Analyze the current dynamics and future expectations of the
ASC industry.
II.
Describe the ASC transaction market and historical acquisition
activity.
III.
Discuss the purpose and application of an ASC valuation.
I.
Analyze the current dynamics
and future expectations of the
ASC industry.
US Healthcare Spending

US healthcare spending per capita higher than our “peers”
2012 Health Expenditures Per Capita
Norway
$9,055
Switzerland
$8,980
United States
$8,895
Luxembourg
$7,452
Denmark
$6,304
Australia
$6,140
Canada
$5,741
Netherlands
$5,737
Austria
$5,407
Sweden
$5,319
Belgium
$4,711
France
$4,690
Germany
$4,683
Iceland
$3,872
United Kingdom
$3,647
Italy
$3,032
Spain
$2,808
Singapore
Greece
Portugal
$2,426
$2,044
$1,905
Source: World Health Organization National Health Account database
Page 4
US Healthcare Spending

US healthcare spending as % of GDP higher than our “peers”
Source: World Health Organization National Health Account database
Page 5
US Healthcare Spending

US healthcare spending high as compared to GDP

Healthcare is currently 17.2% of GDP (projected to be approximately 17.4% for 2013)

Healthcare spending in the U.S. grew 3.7% in 2012, which is slightly greater than the increase in 2010

By 2020, national health spending is expected to reach $4.5 trillion and comprise 19.2% of GDP
Healthcare Spending as a % of GDP and YoY Growth
YoY Growth in Healthcare Expenditures
Healthcare Spending % of GDP
20.0%
18.0%
17.2%
17.4%
16.0% 15.4%
15.5%
14.0%
11.9%
12.0%
13.4%
12.1%
9.4%
10.2%
10.0%
8.0%
13.4%
8.9%
7.0%
6.8%
5.6%
6.0%
3.8%
4.0%
3.7%
2.0%
0.0%
1980
1985
1990
1995
Source: World Health Organization National Health Account database
2000
2005
2012
Page 6
US Drivers of Greater Integration
Valuebased
Payment
Hospitals
Clinical
Integration
Employment /
PSA
IDS
Changes in
Reimbursement
Other
Providers
(ASCs)
Care
Mgmt
Physicians
Demand for
HIT/Capital
Page 7
Current Market Observations

Healthcare is Headed towards “Accountable Care”

Where do procedure-driven providers fit, are they positioned well?
Fee-for-Service
Shared Savings / Value
Based Reimb. / Bundled
Payments
Physicians/Hospitals
Acting Independently
Physicians & Hospitals
Collaborating
ASC’s Operating
Independently
ASC’s merging, becoming
Part of the Continuum of
Care
Strong Revenue Growth
Cost Containment &
Operating Efficiencies
More Facilities/Capacity
More Efficient
Facilities/Consolidation
?
Page 8
How are ASC’s Positioned?

ASC Industry is positioned well
•
Have been/will be the low cost provider
•
Deliver care efficiently/safely with high patient/physician satisfaction

ASC’s are in-demand

Healthcare systems pursuing network development

•
Is integration into larger system a good thing for cost containment?
•
Physician alignment still important
Independent ASC’s may not have leverage with changing
reimbursement models
Page 9
ASC Industry

Slowdown in government ASC payments and new ASC
construction point to a mature market
Medicare ASC Payments and Certified ASCs, 2000-2012
6,000
$4,000
$3,500
5,000
$3,000
4,000
$2,500
3,000
$2,000
$1,500
2,000
$1,000
1,000
$500
0
$0
2000
2001
2002
2003
2004
2005
2006
2007
Medicare ASC Payments (in millions)
Source: The Medicare Payment Advisory Commission
2008
2009
2010
2011
2012
Certified ASCs
Page 10
ASC Industry

YOY Volume growth slowing down with some pricing growth
Average Surgical Case Volume Growth
Net Revenue per Surgical Case Growth
5,650
$2,240
$2,220
+0.4%
+0.3%
5,600
+0.8%
5,605
5,589
$2,216
$2,200
$2,207
$2,180
5,550
+2.9%
$2,160
5,547
+1.3%
+1.0%
$2,140
5,500
$2,120
5,476
$2,146
$2,124
$2,100
5,450
$2,080
5,400
$2,060
FY 2011
FY 2012
FY 2013
TTM 2014
FY 2011
FY 2012
FY 2013
TTM 2014
Source: VMG Health Proprietary Analysis
Page 11
Mature Industry


All Signs Point to a Mature ASC Industry:
Growth in ASC
Development has Leveled
Off
Same Center Growth has
Flat-Lined
ASC Supply Exceeds
Physician Demand in Most
Markets
Significant Capacity at Many
ASCs
Growth in Observed ASC
Mergers & Consolidation
Initial Stages of
Consolidation among ASC
Management Companies
What to Expect in a Mature Industry:
Attracting Physician Investment & Volume will be the
Greatest Challenge
Increase in ASC Mergers & Limited ASC
Failure
Increased Involvement of Hospitals in
ASC Industry
Expected Return for ASC Investors will be
Moderated
Existing ASCs will need to Focus Efforts on
Implementing Efficiencies
Page 12
Benchmark Analysis – ASC
 Less reliance on revenue growth
Same ASC Revenue Growth (YoY)
Net Revenue Growth
EBITDA Growth
ASCs are beginning to rely less on
revenue growth to enhance their
margins
5.0%
3.0%
1.0%
-1.0%
-3.0%
-5.0%
2012
2013
TTM 2014
Net Revenue Growth
4.1%
3.7%
0.5%
EBITDA Growth
1.1%
3.4%
0.8%
Source: VMG Health Proprietary Analysis
Page 13
ASC Industry

ASC industry is mature, de novo centers still developed

Cost containment will be primary driver of profitability

New CPT’s/technology will help volume growth

Uncertainty regarding healthcare reform’s long-term impact

Physician realignment:


Supply of physicians will likely no meet demand

Hospitals have increased physician employment to build integrated networks
Continued managed care and Medicare reimbursement
pressure, move to value-based purchasing
Page 14
II. Describe the ASC transaction
market and historical acquisition
activity.
ASC Buyers – Control Transactions

Who are the buyers, what are the motives?
Category
Hospitals / Health Systems
Management
Companies /
Operators
Type
Strategic
Financial / Strategic
Strategic
Strategic
Geography
In Market
In/Out of Market
In Market
In Market
•
Notes
•
Driven by: Physician
alignment, OP network
expansion, ORs maxed
out, etc.
Reimbursement
leverage vs HOPD – but
do you want it?
•
•
•
Growth by
acquisition
JV’s w/ Hospitals
/Systems
Competing
models /
abilities
•
•
Surgery Centers
Physician Owned
Hospitals
Typically
Cashless Merger
Target usually a
struggling or at
capacity
•
•
Can address
POH capacity
constraints
Difficult due to
limited
physician equity
Page 16
ASC Buyers – Control Transactions

Management Companies / Operators – League Table
Center
Count
Name
Center Count
Name
AmSurg
United Surgical Partners
International
246
Physicians Endoscopy
28
Foundation Surgery Affiliates
11
202
ASD Management
25
Cirrus Health
10
Surgical Care Affiliates*
185
Regent Surgical Health
25
Medical Consulting Group
10
HCA
124
Covenant Surgical Partners
19
SurgCenter Development
121
Surgery Center Partners
17
Symbion
52
Meridian Surgical Partners
17
Murphy Healthcare
8
Surgery Partners
50
Surgical Management
Professionals
17
Sovereign Healthcare
7
15
Interventional Management
Services
6
15
Global Surgical Partners
6
14
Surgical Synergies
5
14
Arise Healthcare
3
Name
Tenet
44
Ambulatory Surgical Centers
of America
36
Community Health Systems
34
Nueterra
30
Surgem
Blue Chip Surgical Center
Partners
Constitution Surgery
Partners
Practice Partners In
Healthcare
Center
•
Count
Facility Development and
Management, LLC
Ortmann Healthcare
Consultants
•
Management
Agreement
terms vary,
typically
between 4-7%
•
Post-deal
operational
changes vary
greatly
•
Not unusual to
have >5 offers
for control deal
9
9
TOTAL 1,428
Equity models
vary: 0%, <50%,
51%
*Note: Surgical Care Affiliates total includes approximately twenty surgery centers included in the Health Inventures acquisition, announced June 2013.
*Tenet/USPI joint venture will have ownership interests in 244 ASCs. The transaction is expected to close by the third quarter of 2015.
Sources: Company websites, press releases, and SEC filings
Page 17
ASC Buyers – Control Transactions

Consolidating Management Companies
Tenet announces acquisition of USPI – JV ownership in 244 Centers (March 2015)
AmSurg acquisition of Sheridan – Diversifies (July 2014)
Surgery Partners announces acquisition of Symbion – (June 2014)
Graymark acquisition of Foundation Healthcare – 21 Centers (July 2013)
SCA acquisition of Health Inventures – 20 Centers (June 2013)
AmSurg Corp. acquisition of National Surgical Care – 18 Centers (Sept 2011)
USPI acquisition of Titan Health Corporation – 14 Centers (Sept 2011)
Surgery Partners acquisition of NOVA – 37 Centers (January 2011)
Page 18
ASC Buyers – Control Transactions

Public ASC companies trading above 9x EBITDA
Public Company Multiples as of April 9, 2015
9.5
Surgical Care Affiliates, Inc. (SCAI)
2.8
12.5
AmSurg Corp. (AMSG)
3.7
0.0
2.0
TTM EBITDA
4.0
6.0
8.0
10.0
12.0
14.0
TTM Revenue
Source: CapitalIQ data as of April 9, 2015
*Not necessarily FMV for single location ASCs
Page 19
ASC Buyers – Control Transactions

Demand for Acquisitions is High

Need for ASC management companies to exhibit growth

On average, same center performance provides low single digit growth

Look for continued consolidation of operators

Hospitals are in the buyers market, but strategy driven

Buyers and strategies are different, and make a difference

Lots of action in ASC market = good place to be in era of HC
reform
Page 20
III. Discuss the purpose and
application of an ASC valuation.
Why is a Valuation Needed
 Fair Market Value (“FMV”) – the only premise of value to meet the AntiKickback Statute and Private Inurement Regulations
 Both for-profit and not-for-profit health care providers that accept
payments from government programs (i.e., Medicare) must ensure that
exchanges between them and other providers are at FMV
 Definition:
 The price, expressed in terms of cash equivalents, at which a
property would change hands between a hypothetical willing
and able buyer and a hypothetical willing and able seller,
acting at arms length in an open and unrestricted market,
when neither is under compulsion to buy nor to sell, and
when both have reasonable knowledge of the relevant facts.
Page 22
How Value is Measured – Fair Market Value
Valuation Methodologies – All Three
 Cost Approach
 Provides a Floor for Value – Tangible Assets +
Identifiable Intangibles
Valuation Trend – LTM
Stable
 Income Approach
 Discounted Cash Flow Value – Measure Future
Benefits of Ownership
 Market Approach
 What are Transaction Values of Comparable
Companies
Up
Without detailed understanding of ASC benchmarks and specific ASC fact patterns, there is
risk of FMV appraisals mis-valuing the transaction…
Page 23
Risk Factors Affecting FMV
Out-of-Network
Reliance on
Exposure
Non-Owner Physicians
Financial
Leverage
(Debt
Load)
Legal /
Partnership
(Non-Compete)
Facility & Equipment
Age /
Condition
Physician
Diversification
Barriers
to Entry
(CON)
Service
Line
Diversification
Market
Competition
Healthcare
Reform
Stable Past
Performance
(Longevity)
Page 24
Control vs Minority Transactions


Control Transactions

Supply and demand: many buyers + fixed supply = higher pricing

More buyers = almost all terms are negotiable

Smarter sellers: highest price isn’t winning deal, if strategic considerations

Result: Seller’s market
Minority Transactions (Physician Perspective)

Supply and demand: Many sellers (ASC’s) + limited supply (physicians) =
stable / reduced pricing trends.

Alternative investment risk: share price vs market alternatives
Page 25
How Value is Measured – Control

Market Multiples

Multiple of earnings applied to EBITDA (earnings before interest, taxes,
depreciation, and amortization)

Devil is in the details – which EBITDA?

Historical EBITDA? Normalized Historical EBITDA? Proforma EBITDA?

Hard to understand multiples without deal knowledge: see Devil above…

Regulatory considerations – Fair Market Value??
Page 26
How Value is Measured – Minority

Market Multiples approach, but buy/sell driven

Minority EBITDA multiples can range from 40% to 60% less than control
level

EBITDA multiple, formulaic approach/stated in operating agreement

Return on Investment based approach – cash on cash return

Fair Market Value??

Control / minority share transactions happen at different valuations…
need to document the reasons!
Page 27
Observed ASC Valuation Trends
ASC Valuation Trends as Multiple of EBITDA
Acquisition
Multiples have
widened and
trended up in last
1-2 years
8.0
7.0
Control Multiples
6.0
5.0
4.0
Minority Multiples
3.0
Minority multiples
have Declined and
Widened
2.0
1.0
0.0
2005
Present
Source: VMG Health Proprietary Analysis
Page 28
Conclusions & Expectations
 Control Transactions
 Sellers market – many buyers competing for deals
 Strategy is winning too – price isn’t the whole story
 Minority Transactions
 Buyers market – many opportunities for physicians
 Documenting FMV increasingly important
 Value Drivers
 Cost containment
 New procedures?
 Affiliation, sale, re-syndication, etc…
Page 29
Questions?
Clinton Flume, CVA
Director
[email protected]
214.369.4888
Chance Sherer, CVA
Director
[email protected]
214.369.4888
Page 30